Chris and Zuri have been married for twelve years and have two children.  Zuri has worked and earned the primary family income for many years.  Most recently, Chris has been a stay-at-home parent.  Zuri's employer offers a very comprehensive set of employee benefits.  Zuri was careful when originally enrolling in the benefits plans as a new employee five years ago, trying to get only the benefits the couple felt were critically important.  At that time, Zuri was hired at a salary of $50,000.  Zuri elected to put $2,500/year into the company 401(k) in order to get the 5% company retirement matching contribution.  Zuri feels good about sticking with that same contribution even though times have been hard.  Zuri elected the PPO health insurance option which has much more expensive premiums than the other option -- a high-deductible plan with health savings account (HSA).  For those who elect the HSA, the company contributes $3,000/per year to the HSA, but the HSA has a $4,000 family deductible.  The PPO, by contrast, has good coverage with just a $1,000/per person deductible.  Zuri is glad the whole family's health has been good and they have only needed basic preventative care because they couldn't have afforded any expense beyond the premiums.  Other than the 401(k) contribution, they do not have any savings and have always lived paycheck to paycheck (i.e., with no extra money each month) despite the fact that Zuri's salary has risen to $65,000.  Kids are just so expensive!  In fact, when their first child was born, Chris left the workforce to stay at home since the childcare expense would have been more than Chris's income at the time.  But their circumstances have recently changed and they have many decisions to be made. 

Sadly, Chris's mother Sherri recently passed away from unexpected heart attack.  While Sherri was not a wealthy woman, her savings paid for her medical bills and final expenses.  As an only child, Chris inherited everything.  Sherri had many lovely family heirlooms that Chris and Zuri have incorporated into their household - sterling silver that had belonged to Chris's great grandmother, a number of valuable antiques and a several beautiful pieces of art created by Chris's grandfather who was a moderately famous artist.  The items hold such sentimental value that Chris did not want to part with them, and Chris is grateful that Zuri was willing to make space for the heirlooms in their modest current home (referred to as their "Home").  In addition, it turns out that Sherri had a $200,000 life insurance policy naming Chris as the beneficiary.  Finally, Chris will inherit Sherri's home on Grove Avenue (the "Grove House") which is only a few blocks from the couple's Home.  Sherri paid $50,000 for the Grove House in 1985, and it is worth $185,000 now.  Chris has no idea how Sherri's passing will affect the couple's taxes, but the couple knows they are receiving life-changing amounts of money and property.   

To honor Sherri's memory, Chris and Zuri feel strongly that they want to make good financial decisions.  They do not think they need a second car since Zuri takes the train to work.  Their existing car is old, but that means they have been comfortable with the minimum required car insurance.  They think they will keep their existing car for the next several years.  They know they would like to spend some small amounts on valuable experiences, including swimming and piano lessons for the children and a reasonable family vacation.  But they would welcome any advice about other financial issues they should consider.  In particular, they face a major question - what to do with their two real estate properties (their Home and the Grove House).  They think they would like to either keep both properties or sell both properties.  They would like advice on the tax impact of each of the following possible actions: 

Selling both properties: 

1. They might sell their Home and then begin building a new and more expensive home for their family.  They have lived happily in their Home since purchasing it for $100,000 ten years ago.  They think their Home would now be worth $200,000 but are concerned about how much they would owe in taxes if they were to sell their Home. 
2. If they sell their Home, they would then move into the Grove House for a time.  Although home prices have been rising rapidly in their area, the entire neighborhood in which their Home and the Grove House are located is a subdivision that still has undeveloped land available for sale for $25,000 per lot.  They would plan to buy such a lot and build a large new home on it.  They think they would live in the Grove House for about a year while building their new home.  Then, they would move into their newly-constructed home and sell the Grove House (which they believe should sell within six months). 

Keeping both properties:  

1. If they decide to keep their existing Home, they might consider paying off the outstanding mortgage on their Home.  The current balance is $60,000.  They pay about $3,000 per year in mortgage interest on their Home. 
2. If they keep their Home, they would also keep the Grove House but use it as a rental property.  They believe they can easily rent the Grove House for $1,300 per month.  They believe their out-of-pocket cash expenses for the rental will amount to approximately $9,500 per year (for instance, property taxes, sewer bill, payments to brokers to find tenants, etc.).  The Grove House is in good condition, so they believe they will not have many unanticipated expenses.  But they are not sure how rental property income is taxed and whether they would be entitled to deductions.  They are not sure they want to pay significant additional taxes as a result of rental income from the Grove House. 
3. This problem asks you to advise a couple on some major decisions they are facing.   It is a long hypothetical.  read the fact pattern carefully and then explain your recommendations in detail. 

    

Answer rating: 100% (QA)

Introduction Chris and Zuri find themselves at a pivotal point in their lives dealing with significant financial decisions following the passing of Chriss mother Sherri Inherited assets including a li... View the full answer